Download Policy Coordination - Center for Research on Political Economy

BY
ABWAKU ENGLAMA, ABU BAKARR TARAWALIE
AND
CHRISTIAN R. K. AHORTOR
A Paper Prepared for the Fourth Annual Conference on
Regional Integration in Africa (ACRIA4)
Abidjan, Côte d’Ivoire
July 4 -6 2013
OUTLINE OF THE PRESENTATION
Introduction
Research Problem & Objective
Justification and Relevance
Institutional arrangements for policy
coordination in the WAMZ
Literature Review
Theoretical Framework and Methodology
Presentation and Analysis of Results
Conclusion and Policy Recommendations
INTRODUCTION
Stable and non-inflationary economic growth
remains the focus of economic policy.
Fiscal policy is to reduce unemployment rate.
Monetary policy is to maintain price stability.
Fiscal and monetary policies are not mutually
exclusive.
Hence, lack of policy coordination may result
in serious economic dislocations.
RESEARCH PROBLEM & OBJECTIVE
Non appreciation of policy interdependencies
 Fiscal policy influences price developments, real interest
rates, exchange rates as well as aggregate demand and
potential output.
 Monetary policy has an impact on exchange rates, inflation
expectations and short-term interest rates with implications
for government borrowing.
Non-compliance with inflation and fiscal deficit
criteria in the WAMZ.
The study, therefore, seeks to investigate the level of
coordination between the fiscal and monetary
authorities in each of the WAMZ countries.
RELEVANCE AND JUSTIFICATION
Provides evidence of the status of policy
coordination in the WAMZ countries.
Produces empirical assessment
of
effectiveness of policy coordination in the
Zone.
Proffers recommendations on building
formal policy coordination platforms.
Promotes compliance with the convergence
criteria.
INSTITUTIONAL ARRANGEMENTS FOR
POLICY COORDINATION IN THE WAMZ
Monetary
policy
objectives,
frameworks,
instruments, conduct and outcomes, central bank
independence
Fiscal policy objectives, frameworks, instruments
conduct and outcomes
Line of communication between fiscal and
monetary authorities
Policy coordination – platforms, periodicity,
binding decisions, monitoring and evaluation
units and effectiveness.
Gambia – Monetary Policy Goal & Instrument
60.0
Figure 1: The Gambia - Trends in M2 Growth and
Inflation, 1980- 2011
50.0
Percent
40.0
30.0
20.0
10.0
0.0
-10.0
M2 Growth
Inflation
The Gambia – Fiscal Policy Goal & Instrument
30.0
Figure 2: The Gambia - Trends in Fiscal Deficit and
Real GDP Growth, 1980- 2011
20.0
Percent
10.0
0.0
-10.0
-20.0
-30.0
Fiscal Deficit / GDP
Real GDP Growth
Ghana – Monetary Policy Goal & Instrument
150.0
Figure 3: Ghana - Trends in M2 Growth and Inflation,
1980- 2011
Percent
100.0
50.0
0.0
-50.0
M2 Growth
Inflation
Ghana – Fiscal Policy Goal & Instrument
Figure 4: Ghana - Trends in Fiscal Deficit and Real
GDP Growth, 1980- 2011
20.00
15.00
Percent
10.00
5.00
0.00
-5.00
-10.00
-15.00
Real GDP Growth
Fiscal Deficit/ GDP
Guinea – Monetary Policy Goal & Instrument
80.0
Figure 5: Guinea - Trends in M2 Growth and Inflation,
1988- 2011
Percent
60.0
40.0
20.0
0.0
-20.0
M2 Growth
Inflation
Guinea – Fiscal Policy Goal & Instrument
Figure 6: Guinea - Trends in Fiscal Deficit and Real
GDP Growth, 1988- 2011
10.0
Percent
5.0
0.0
-5.0
-10.0
-15.0
-20.0
Fiscal Deficit/ GDP
Real GDP Growth
Liberia – Monetary Policy Goal & Instrument
Figure 7: Liberia - Trends in Reserve Money Growth
and Inflation, 1980- 2011
80.0
Percent
60.0
40.0
20.0
0.0
-20.0
-40.0
Reserve Money Growth
Inflation
Growth (Percent)
Figure 8: Liberia - Trends in Fiscal Deficit and Real
GDP Growth, 1980- 2011
150.0
1.0
100.0
0.5
50.0
0.0
0.0
-0.5
-50.0
-1.0
-100.0
-1.5
Real GDP Growth
Fiscal Deficit/ GDP
Deficit (Percent)
Liberia – Fiscal Policy Goal & Instrument
Nigeria – Monetary Policy Goal & Instrument
Figure 9: Nigeria - Trends in Reserve Money Growth
and Inflation, 1980- 2011
160.0
140.0
Percent
120.0
100.0
80.0
60.0
40.0
20.0
0.0
-20.0
Reserve Money Growth
Inflation
Nigeria – Fiscal Policy Goal & Instrument
Figure 10: Nigeria - Trends in Fiscal Deficit and Real
GDP Growth, 1980- 2011
15.0
10.0
Percent
5.0
0.0
-5.0
-10.0
-15.0
-20.0
Fiscal deficit/GDP
Real GDP Growth
Sierra Leone – Monetary Policy Goal & Instrument
Figure 11: Sierra Leone - Trends in Reserve Money Growth
and Inflation, 1980- 2011
200.0
Percent
150.0
100.0
50.0
0.0
-50.0
Inflation
Reserve Money Growth
Sierra Leone – Fiscal Policy Goal & Instrument
Figure 12: Sierra Leone - Trends in Fiscal Deficit and Real
GDP Growth, 1980 - 2011
30.0
20.0
Percent
10.0
0.0
-10.0
-20.0
-30.0
Fiscal Deficit/ GDP
Real GDP Growth
LITERATURE REVIEW - THEORIES
 The fiscal theory of price level determination (FTPL) (Semmler
and Zhang, 2003)
 The time paths of government debt, expenditure and taxes do not
satisfy the inter-temporal solvency constraint
 In equilibrium, the price level has to adjust in order to ensure
government solvency
 Monetary policy alone does not provide the nominal anchor for
an economy.
 Strategic interactions within a game theoretic framework
(Sargent and Wallace, 1981)
 If the central bank takes the lead in setting the path of inflation,
then the fiscal authority, should select a sequence of primary
surpluses (and debt) that is consistent with money supply
 under a fiscal dominance regime, monetary authorities may be
called upon to accommodate.
LITERATURE REVIEW - EMPIRICS
 Lambertini
and Rovelli (2003), Tabellini (1986),
Muscatelli et al. (2002), Zoli and Lambert (2005), Hasan
and Isgut (2009), Arby and Hanif (2010) & Chuku (2012),
etc.
THEORETICAL FRAMEWORK AND
METHODOLOGY
U F  f (  ,  ,  ).............................................(1)
U M  f (  ,  ,  ).............................................(2)
U F  f (r , s,  ,  )...........................................(3)
U M  f (r , s,  ,  )...........................................(4)
s  f ( m,  , g , d ).............................................(5)
r  f ( s ,  , e, )..............................................(6)
  f ( m, s,  , g , d ,  ).....................................(7)
  f ( m, s,  , e, ,  ).....................................(8)
EMPIRICAL MODEL SPECIFICATION
1. Set Theoretic Approach
Table 4.1: Macroeconomic Environment Matrix
Target
Shocks to Fiscal Positive (P)
Policy
Target
(Growth)
Negative (N)
Shocks to Monetary Policy Target
(Inflation)
Positive (P)
Negative (N)
P, P
P, N
N, P
N, N
Table 4.2: Policy Response Matrix
Policy Direction
Fiscal
Response
Policy Contraction (C)
Expansion (E)
Monetary Policy Response
Contraction (C)
Expansion (E)
C, C
C, E
E, C
E, E
STA: Strength of Policy Coordination
spct  n  Pt 1Pt 1  Ct Ct   n  Pt 1Nt 1  Ct Et   n  Nt 1Pt 1  EtCt   n  Nt 1Nt 1  Et Et  T
0.5  spc  1  Strong Policy Coordination
0  spc  0.5  Weak Policy Coordination
spc  1  Perfect Policy Coordination
spc  0  No Policy Coordination
2. A Vector Autoregressive Technique
p
p
p
p
p
s 1
s 1
s 1
s 1
s 1
GAPt  1  1sGAPt s   1s RMGt s   1s FSGt s    1s INFt s  1s EXRt s  1t
p
p
p
p
p
s 1
s 1
s 1
s 1
s 1
p
p
p
p
p
s 1
s 1
s 1
s 1
s 1
p
p
p
p
p
s 1
s 1
s 1
s 1
s 1
p
p
p
p
p
s 1
s 1
s 1
s 1
s 1
RMGt   2   2 s GAPt s   2 s RMGt s   2 s FSGt s    2 s INFt  s  2 s EXRt s   2t
FSGt   3  3sGAPt s   3s RMGt s   3s FSGt s    3s INFt s  3s EXRt s   3t
INFt   4   4 sGAPt s   4 s RMGt s   4 s FSGt s    4 s INFt s  4 s EXRt s   4t
EXRt   5  5 s GAPt s   5s RMGt s   5s FSGt s    5s INFt s  5s EXRt s  5t
ESTIMATION TECHNIQUE AND DATA
Unrestricted VAR – Impulse Response Functions
Sources of data: Country Authorities, WAMI database,
IFS
Study period: 1980 – 2011 (Guinea 1988-2011)
EMPIRICAL RESULTS - STA
Table 5.1: Strength of Fiscal and Monetary Policy Coordination in the WAMZ
Countries
Country
Policy
Fiscal Prudence
Monetary
Coordination
Score (%)
Prudence
Score (%)
Score (%)
The Gambia
10.3
48.3
34.5
Ghana
34.5
44.8
48.3
Guinea
19.0
47.6
47.6
Liberia
17.2
41.4
51.7
Nigeria
16.7
58.6
41.4
Sierra Leone
31.0
48.3
65.5
THE GAMBIA: NON-ACCUMULATED RESPONSES OF FISCAL DEFICIT
Response to Generalized One S.D. Innovations ± 2 S.E.
Res pons e of FSG to FSG
Res pons e of FSG to GAP
4
4
3
3
2
2
1
1
0
0
-1
-1
-2
-2
-3
-3
2
4
6
8
10
12
2
14
4
Res pons e of FSG to INF
6
8
10
12
14
12
14
Res pons e of FSG to EXR
4
4
3
3
2
2
1
1
0
0
-1
-1
-2
-2
-3
-3
2
4
6
8
10
12
14
Res pons e of FSG to M2G
4
3
2
1
0
-1
-2
-3
2
4
6
8
10
12
14
2
4
6
8
10
THE GAMBIA: NON-ACCUMULATED RESPONSES OF MONEY SUPPLY GROWTH
Response to Generalized One S.D. Innovations ± 2 S.E.
Res pons e of M2G to FSG
Res pons e of M2G to GAP
15
15
10
10
5
5
0
0
-5
-5
-10
-10
2
4
6
8
10
12
2
14
4
Res pons e of M2G to INF
6
8
10
12
14
Res pons e of M2G to EXR
15
15
10
10
5
5
0
0
-5
-5
-10
-10
2
4
6
8
10
12
14
Res pons e of M2G to M2G
15
10
5
0
-5
-10
2
4
6
8
10
12
14
2
4
6
8
10
12
14
SUMMARY OF FINDINGS
Weak policy coordination in all the WAMZ countries
during the study period.
Results from the set theoretic coordination scores
ranged from 10.3 percent in The Gambia to 34.5
percent in Ghana, clearly less than the 50.0 percent
benchmark for adequate policy coordination.
The IRFs indicate that variables converge to their
original values after a very long time, implying weak
responses of policy variables to different shocks
Weak responses from fiscal deficit and inflation
confirms the generally non-compliance with these two
criteria by Member States of the WAMZ .
RECOMMENDATIONS
Generally, the authorities should
 formalise policy coordination processes.
 establish or strengthen set rules and procedures for
policy coordination.
 make policy decisions emanating from coordinating
meetings binding.
 equip statistical bureaux/ offices to produce quality high
frequency data on a timely basis.
 enhance the capacity of relevant policy institutions to
fully understand the cyclical nature of their respective
economies.
 identify
and
strengthen
policy
transmission
mechanisms through key policy reforms.
 establish monitoring and evaluation units.
THANK YOU FOR YOUR
ATTENTION.